Eric Hommelberg: A 2,000 Dow or $10,000 Gold?

The Gold Report: Metals and commodities guru, Jim Sinclair, says that gold is acting as a barometer of economic anxiety at the moment. Do you agree with that assessment?Eric Hommelberg: I am more apt to call gold a barometer of our financial system's health. When things get out of control and people start losing confidence in what governments and central banks are doing, then gold will start to outperform all fiat currencies in the world. That's the transition from gold as a commodity to gold as currency. Today, gold has already reasserted itself as currency of choice since gold has outperformed all world currencies already for quite some time now.TGR: But gold has come off its high of $1,580/oz. to settle around $1,500/oz. If you were to put your finger on the pulse of the global economy, with 10 representing complete panic and one representing sedate, where would you say we are now on the anxiety scale?EH: I would say seven at this point in time.TGR: What is underpinning that anxiety?EH: People are losing confidence in what governments are doing. Just look at what is happening in Europe, Greece and Spain. People are protesting against their own governments and that's certainly underpinning the anxiety there.TGR: As someone who lives in Europe, do you think there is more fear there than there is in North America?EH: No, it's terrible in both places and that's why I believe gold will continue to perform well. It's not a matter of dollar versus euro, or what currency is better. Both the dollar and euro are in terrible shape. There's no real alternative for holders of global currency at the moment. That's why gold will perform well in the coming years, because gold is the only alternative.TGR: What are some tangible ways that gold is crawling back into the currency system?EH: A lot has happened over the last couple of years. A few international leaders, including those in Russia and China, have called for a super-currency to replace the U.S. dollar as a reserve currency and they believe that gold should play a role in that. This was illustrated in 2009 during the G8 press conference, when Russian President Dmitry Medvedev held a single shiny gold coin that he said represented a symbol of unity and a possible future world currency. The idea of gold playing an important role in a new monetary system is picking up steam quickly. Last year former Federal Reserve Chairman Alan Greenspan said that fiat money has nowhere to go but gold; World Bank President Robert Zoellick called for a return to a kind of gold standard; and last week Columbia University Professor Robert Mundell, the father of the euro and a 1999 Nobel Laureate, proposed gold convertibility for the euro and the dollar. Also the central banks are turning back to gold. In the euro zone last year, central banks became net gold buyers for the first time since the inception of the euro. That trend will continue.TGR: What are some key reasons to own gold?EH: The most important reason to own gold is the protection of wealth. Paper currencies always disappear over time, but gold will always retain its purchasing power as it has done for more than 6,000 years.TGR: Our culture teaches that gold is a commodity and that it has no real use. Is this something that needs to be fundamentally changed?EH: That will change by itself. The current monetary system is just an experiment that started in 1971 when President Nixon was forced to abandon the gold standard. It seems that the experiment is coming to an end these days as people are losing faith in paper currencies and fleeing into gold. Look at Greece today where citizens are buying gold because of fear of a sovereign default and run on the banks. The Greek people certainly don't view gold as a commodity, but as a hedge against the government.TGR: I agree with you to a point, but it's largely impractical to use gold as a currency. Could we reach a point when there is "digital gold," such as a bank account based on a deposit of gold?EH: That's already happening. Look at Gold Money, for example. More of these kinds of things are coming into the market. I am not sure that digital gold will be the standard in the future, but these kinds of things already exist. I am not sure what kind of monetary system there will be, but it's almost certain that gold will play an important role in that system.TGR: Are the reasons to own silver essentially the same as the reasons to own gold?EH: Yes, silver has always played a similar role as gold; it has been used as a monetary metal for centuries, just like gold. It moves in the same direction as goldalthough in a much more volatile way. On the upside, silver will outperform gold in a significant way, which makes it a very attractive alternative for people who cannot afford to buy gold. That's why silver is often called the poor man's gold.TGR: You use the Dow:gold ratio chart as a tool to time the market to some extent. In an article entitled, "Gold: $200 or $10,000," you wrote, "It's simple: when the Dow:gold chart tops, you buy gold; when the Dow:gold chart bottoms, you buy equities." What's the chart saying now?EH: The Dow:gold ratio chart is not a perfect tool to predict gold movements in the short term. But it's a very useful tool to see whether or not you're close to the beginning of a bull market or almost at the end. Right now, the Dow:gold ratio stands at eight. Historical patterns of the chart show that it tends to bottom out at one. If gold and the Dow should come to parity, or 1:1, that would imply the gold price is going up to $10,000/oz. or more. It could also mean the Dow is coming down to less than 2,000. I don't see the latter happening because of the depreciation of the U.S. dollar. It's not only the Dow:gold ratio chart pointing to gold prices exceeding $10,000/oz. When you measure gold as a function of public debt, gold should exceed $12,500/oz. in order to counterbalance the total U.S. public debt held in foreign hands. Also, when gold's long-term chart is adjusted for inflation using John Williams' Shadow Government Statistics inflation figures, gold should rise to about $9,000/oz. in order to challenge its 1980 high. So yes, the idea of gold rising to $10,000+/oz. before gold's bull run has run its course is not something that can be easily rejected.TGR: In a 2009 interview, you said juniors were poised for a bull run and 2010 proved you rightit was an exceptional year for junior equities. However, so far this year, junior silver and gold equities have largely underperformed gold. What are the key reasons that is happening?EH: It's a combination of things. In the dramatic decline of the juniors in 2008, they were really decimated and lost 80% to 90% of their value. The CDNX gold chart shows that some of the junior sector is still recovering from that severe decline. By the end of 2008, the junior sector was so dramatically oversold that it had to rebound. In 2009 and 2010, many juniors went up 500%-to-600% or more. By the end of 2010, from a technical point of view, they were due for a correction again and that's what happened at the beginning of this year. However, this recent correction has been accelerated by fear in the financial markets.TGR: What was interesting about 2008 was that after a remarkable 2007 there was a fall-off in junior equities in the second quarter. That ended up being a bellwether of what was going to happen in the fall of 2008. Do you think it's likely that we're going to see that sort of collapse again in the fall of 2011?EH: That's what people are afraid of. It all depends on what happens in the next couple months. It's difficult to predict. The charts do indicate a severely oversold condition from a technical point of view. It is almost equal to what we had in 2008. But in order to have a collapse in mining equities like what occurred in 2008, the gold prices should be coming down hard as well, and I don't see that happening.TGR: What are some principles that investors should follow in this particular down swing?EH: Even though junior shares are severely oversold, that doesn't mean investors should start buying them hand over fist. Keep watching them and wait until the downtrend is breached to the upside. As long as an item stays in a downtrend, don't touch it. Just stay on the sidelines. The charts do suggest a rebound, however, sometime soon.TGR: When you talked with us in October 2009, you expected Endeavour Silver to perform well; it was trading around $2.50 at that time. During the following 18 months its share price appreciated almost 400%. Do you still like Endeavour at current price levels?EH: Yes, absolutely, it's simple, Endeavour Silver Corp. (NYSE:EXK; TSX:EDR) is providing everything that an investor could expect from management. It keeps increasing its resource base, trimming production costs, and increasing its production quarter after quarter. The company has reported record production quarter after quarter for seven years now. The company is growing on the back of rising silver prices.TGR: Endeavour put out a release recently that said it hit some high-grade, silver-gold intercepts. The highlight of the program was 404 g/t silver, plus 6.5 g/t gold over about 7.3m at Guanajuato. Do results like these give you hope that Chief Executive Brad Cooke and his team will outline a significantly larger resource at Guanajuato?EH: I have no doubt about it because of what they've been doing for the last seven years.TGR: One of the knocks on Endeavour has been that it doesn't have overly significant resources for production. The numbers keep going up and there is lots of cash flow, but could these intercepts be that massive resource expansion that proves to be a catalyst for the share price?EH: The results are very hopeful indeed, but exploration is always a very tricky business. Just one single drill hole doesn't guarantee anything, but it is very encouraging.TGR: In addition to Guanajuato, Endeavour also produces from the Guanacevi silver mine in Mexico. With cash coming from both of those operations, do you think the company might take some of that cash and expand its footprint?EH: That wouldn't surprise me. I can't look into the mind of Brad Cook, but that's what the company has done in the past. It has a strategy of increasing its resources and reserves first by drilling and exploration and then by means of acquisition. It wouldn't surprise me at all if the company went with that route.TGR: The flip side to that equation is that if the company has success and boosts its production numbers, it could become a takeover target.EH: That could be a possibility as well.TGR: Are there any other companies that you're interested in right now?EH: Yes, I like Victoria Gold Corp. (TSX.V:VIT). It's tremendously undervalued and is almost a screaming buy at this moment. The stock recently trading at around $0.60. Victoria increased its resource base significantly this year and is sitting on more than 7 million ounces (Moz.) of gold. But it is not reflected in the share price. Victoria had a bit of bad luck last year when it had to report an error in the resource estimate of its Cove Project. The stock was punished unfairly. I think the stock is about sold out and we can look forward now to lots of drilling news coming out from the Dublin Gulch property in the Yukon.TGR: Dublin Gulch has a prefeasibility study underway. Do you think that will act as a catalyst for the stock once it's published?EH: The prefeasibility study on the Eagle gold deposit has already been done. It's a bankable feasibility study, which will be coming out in the fourth quarter this year. That could give the company another boost because the new feasibility study could demonstrate a significant increase in Victoria's resource base at Eagle. Part of the 2011 Eagle exploration drilling results will be incorporated into a revised resource estimation. More importantly, the proven reserves, which are standing at 1.7 Moz, will be increased in a significant way. That's not just hope; it's simple math since the 1.7 Moz. reserves estimate is based on a $900/oz. gold price. At $1,500/oz. gold, a big chunk of Eagle's 4.8 Moz. of indicated resources could be upgraded to proven reserves. Fueled by rising gold prices and growing resources and reserves, the Net Asset Value of Eagle's gold project could jump toward the $1B mark. Victoria's current market cap is just about $170M, it's really so tremendously undervalued.TGR: The board at the company is good, too. I know Leendert Krol a little bit. He sold Brazauro Resources to Eldorado Gold Corp. (TSX:ELD; NYSE:EGO) a couple years ago. The board certainly has some significant experience. Where do you think the share price could go by the time Victoria puts out that new feasibility study?EH: Several things are working in favor of Victoria toward year end. First of all, I see a sector bounce for the entire junior sector. Second, Victoria just needs a few weeks of rising share prices to generate a new buy signal from a technical perspective. Previous buy signals triggered Victoria's stock to double within two months. Third, I expect higher gold prices by year end. But the most important thing is the bankable feasibility study, which could show a significant increase in resources and reserves. While Victoria has all these things working in its favor, I think the share price is difficult to predict because we don't know if they will do a financing that could impact its share price. But I expect it will be a multiple of its current value.TGR: When is Dublin Gulch expected to go into production?EH: It's expected to go into production by 2014. That's what is scaring off some shareholders. They fear dilution since it takes a huge amount of money to build a mine. But on the other hand, look at how producers are being valued versus explorers. Most junior producers are valued at an average of about $300/oz. in the ground versus explorers, many of which are valued at less than $50/oz. Victoria is going to be a producer, but investors have to be patient for another three years. At that point, Victoria could very well be a $1B$2B company.TGR: Rising gold prices are an important part of your thesis for Victoria Gold, but there's gold in Endeavour's mines as well. Where do you forecast the gold price to be by the end of 2011?EH: It could be as high as $1,850/oz.TGR: That's a dramatic increase! That's about 20% between now and the end of the year.EH: Exactly. Once fear of sovereign defaults kicks in again, we could see a dramatic increase in the price of gold. The period toward the end of the year is usually a gold-friendly period.TGR: Well, when you talked to us in October 2009, your predictions proved remarkably correct. At that time, you said gold would hit $1,300/oz. by the middle of 2010, and sure enough, that's exactly what happened. So, I guess investors can look forward to some dramatic numbers.Eric Hommelberg is co-founder and CEO of ValcambiGold Inc., a bullion store for Valcambi precious metals products. Since 2002, Hommelberg has written many extensive gold market commentaries with a strong focus on junior gold mining companies, which he used to publish through his GoldDrivers Report. In 2011, Hommelberg and Swiss gold refiner Valcambi sa teamed up and launched ValcambiGold. Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.DISCLOSURE: 1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None. 2) The following companies mentioned in the interview are sponsors of The Gold Report: None. 3) Eric Hommelberg: I personally and/or my family own shares of the following companies mentioned in this interview: Endeavour Silver Corp. and Victoria Gold Corp. I personally and/or my family am paid by the following companies mentioned in this interview: None.